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Apollo Commercial Real Estate Finance, Inc. Message Board

  • RealBeauMec RealBeauMec May 23, 2003 11:36 PM Flag

    reits/new tax law

    There seems to be some debate as to whether reit dividends (such as ARI's) will qualify for the new 15% rate or whether they will be taxed at your regular top rate.

    Of course in the case of ARI, it could get even more complicated to the extent Arden again pays a partial return-of-capital dividend like they did in 2002 (was 43% non taxable).

    Does anyone have any authoritative information on this?

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    • No, congress has always dealt with capital gains changes effective to the date of the legislative signoff. This will stand but will not be a difficult issue since tax programs can easily figure the cap gains rate on individual stock sales. Mutual funds and reits will have to do a "pre 5/6" and a "post 5/6" capital gain breakdown but they have been doing various breakdowns of capital gains for several years now.

    • Here is a summary of the May 22 action, which was, I inderstand, was substantially passed.

      Effective for dividends received in tax years beginning after 2002 and before 2009, dividends received by an individual shareholder from domestic corporations are treated as net capital gain for purposes of applying the capital gain tax rates.

      Therefore, first you can see that it will be limited to Domestic Corporations, Second, for details, I found this on the Congress' website (Yes, they have a website)

      ``(1) Section 243.--For purposes of section 243 (relating to deductions for dividends received by corporations), a dividend received from a real estate investment trust which meets the requirements of this part shall not be considered a dividend.

      Now, I don't have text of the final, so one never does know, but I would bet that they ARE NOT EXEMPT. That does make sense, because REITs are not only required to distribute, but they have the ability to distribute other items (ROC, CG) based on annual activity. Now your return of capital distributions will still not be taxable, and any 1250 gain would still be just that, but the pure dividend part would appear to be taxed fully.

      Now, I would view this as a potential buying opportunity in REITs and Growth Stocks. First, well run REITS, taxable or non-taxable, are still worth owning for diversification purposes and a 5% to 7% dividend reinvested at full taxation, is still nice coumpounding. Second, growth stocks with little or no dividends, will still continue to grow and are still better than a stodgy, slow-growth company that is paying a dividend partially exempt from tax. Even though the laws benefit taxpayers, there is still no increased incentive for companies to distribute more of their earnings if there are better uses for it corporately.

      • 1 Reply to jap2112
      • jap,

        Thanks for the reply but I still don't understand a couple of things. "Dividends received by an individual are treated as net capital gains..." I've seen commentary that says that dividends and capital gains will be taxed at the same rate, but not that the dividends ARE capital gains.

        Sec.243 relates to the 70% dividend received deduction of corporate shareholders. I am an individual, not a corporation, so I don't think this applies to me.

        I'm not saying this is wrong, I just don't see how it applies to me. Could you provide a link to the details provided on the Congressional website? Thanks.

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